The Ministry of Corporate Affairs issued a clarification dated 2 March 2020 on prosecutions filed or internal adjudication proceedings initiated against Independent Directors

  • The term “officer in default” has been defined under section 2(60) of the Companies Act, 2013 (“the Act”). 
  • In the ordinary course, a whole-time director (WTD) and a key managerial personnel (KMP) will be liable for defaults committed by the company. 
  • In the absence of such KMP, the director(s) who have given their consent to incur liability, as per e-form GNL-3 filed with the Registrar, shall be liable. 
  • However, when the penal provisions of the act hold a specific director or officer liable, then action shall be initiated only against that person. For instance, disclosure of interest by directors under section 184 of the Act.
  • As per section 149(12) of the Act, an independent director (ID) or a non-executive director (NED), not being a promoter or a KMP:
  • Shall be liable only with respect to those acts of omission or commission by a company which had occurred with his/her knowledge, attributable through Board processes, and with his/her consent or connivance or where he/she had not acted diligently. 
  • This means that there should not criminal or civil proceedings against IDs and NEDs unless the above criterion is met. 
  • Instances of filing information/records with the registry, maintenance of statutory registers or minutes of the meetings, or compliance with the orders issued by statutory authorities, including National Company Law Tribunal (NCLT) under the Act:
  • Shall not be the responsibility of the IDs or the NEDs.
  • It shall be contrary to the aforesaid only when there are specific requirements provided in the Act. 
  • This generally happens when there are no WTDs and KMPs.
  • When the notice is being served to the company:
  • There should be proper inquiry and investigation to ensure that necessary documents are sought for to ascertain the involvement of the concerned officer in the company.
  • In case the lapses are attributable to the decisions taken by the Board or its Committees, then care has to be taken to ensure that civil or criminal proceedings shall not be initiated against the IDs and the NEDs.
  • It shall be contrary to the aforesaid only when sufficient evidence exists.
  • The records available in the office of the Registrar should also be examined:
  • This shall include e-forms DIR-11 and DIR-12, along with the copies of annual returns or financial statements. 
  • This will help ascertain whether a particular director or the KMP was serving in the company as on the date of default.
  • When there is a doubt with respect to the liability of any person:
  • Guidance may be sought from the Ministry of Corporate Affairs (Ministry) through the office of Director General of Corporate Affairs. 
  • Thus, after receiving due sanction from the Ministry, the proceedings shall be initiated by the Registrar.
  • The circular directs all Registrars to follow the above mentioned Standard Operating Procedure immediately and scrupulously.
  • In cases where prosecution may have already been filed without satisfying the above criteria, the same may be submitted to the Ministry for necessary examination and further directions. 

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